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The Universities Superannuation Scheme, the UK's second largest pension fund, has boosted its inhouse team to help grow its allocation directly into hedge funds over the next two years.

The pension fund, which provides pensions for educational institutions across the UK, has appointed Luke Dixon, previously head of hedge fund due diligence at JP Morgan, as a portfolio manager for its hedge fund unit. Dixon, who began yesterday, will be joined by two analysts, yet to be hired.

Mike Powell, head of alternative assets for the £23bn (€27bn) pension fund, said the team would commit between 5% and 6% of its assets to about 25 hedge funds - European and non-European - over the coming two years. It might also invest in funds of hedge funds focusing on niche areas, he said.

It could round out its involvement in hedge funds by investing in start-up managers next year, Powell said. It already has about £200m in hedge fund replication products, which use derivatives to mirror hedge fund returns.

Powell said the decision by USS's trustees to put about 20% of the fund's money into alternative assets - and around 5% of its assets in total into hedge funds - rested on the reasoning that putting less in would not make much of a difference to the pension fund.

"Our trustee board took the view that, if you're going to make an allocation to alternative assets, it has to be a significant amount to impact the fund. Anything below 20% won't," he said.

USS has about 10% of its assets in other alternatives, including commodities, infrastructure funds and private equity funds.

Emily Porter, USS portfolio manager, said plans to boost the amount it put with hedge funds were delayed last year amid concerns managers were not aligning how often they allowed redeeming investors out to how rapidly they could sell assets to pay them out.

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She said, however, that now was a good time to invest in hedge funds, after many competitors fell away last year, and dislocations in asset values created markets rich in opportunities.

Additionally, Porter said last year stress-tested many portfolios. Difficulties some managers had with problematic assets such as private equity-type, illiquid investments had become visible, she added.

Porter added that many good managers re-opened funds after losing money, and investors, last year, and were now willing to speak with funds such as USS.

"In 2007 we would have found it very hard to get access to the best managers, but now they realise they need good quality investors. As long-term investors, we have better bargaining power," she said.